The process of learning how to invest money may seem daunting, but it’s much easier than you might think, and you can get started regardless of how much money you have saved. Americans invest money in the stock market to build wealth and save for long-term goals such as retirement, but figuring out the best investment strategy can be challenging. There is no need for this to be the case.
Investing money the right way: A step-by-step guide
Each person’s financial situation is unique. A wise investment strategy depends on your personal preferences, as well as your current and future financial circumstances. Creating a sound investment plan requires a thorough understanding of your income and expenses, assets and liabilities, responsibilities and goals.
Investing your money right now can be as easy as following these five steps:
- Find out what your financial goals are, what your timeframe is, and how you feel about risk.
- Decide whether you want to do it yourself or have a professional handle it for you.
- Select an investment account type (401(k), IRA, taxable brokerage account, education investment account).
- Sign up for an account.
- Stocks, bonds, mutual funds, and real estate are all good choices if you want to diversify your investments.
1. Set a goal for your money
In order to figure out how to invest money, you must determine your investing goals, when you want to achieve them, and how comfortable you are with risk.
Long-term goals: At least five years will pass before these goals are achieved. A common goal is a retirement, but you may also have other goals: Do you want to pay for a down payment on a house or pay for college? In 10 years, are you planning to buy your dream vacation home or take a trip for your anniversary?
Short-term goals: It will take less than five years to achieve these goals. You might use this for next year’s vacation, a house you want to buy next year, an emergency fund or a Christmas It is generally not a good idea to invest money for short-term goals.
This post is mainly about long-term goals. In addition, we’ll discuss how to invest without a specific goal in mind. In the end, growing your money is a wonderful goal in itself.
2. Decide how much help you need
Once you know your investment goals, you can move on to picking a type of account, deciding where to open an account, and choosing investment vehicles. You don’t have to go the DIY route if it’s not your cup of tea.
It is common for savers to have someone invest their money on their behalf. Nowadays, that’s quite affordable – even cheap! Thanks to automated portfolio management services, or robo-advisors, it is now possible to hire professional help.
They offer everything from automatic rebalancing to tax optimization and even human help when needed, using computer algorithms and advanced software.
3. Decide which account to invest in
Stocks and bonds can be purchased with an investment account. As there are a number of bank accounts for different purposes – checking, savings, money market, certificates of deposit – there are a few investment accounts as well.
When investing for a specific purpose, such as retirement, some accounts offer tax advantages. It’s important to keep in mind that you may be penalized for withdrawing your money too early or for a reason not covered by the plan. Accounts with general purposes should be used for anything not related to retirement, such as a vacation home, boat, or home renovations in the future.
The following are some of the most popular investing accounts:
If you’re investing for retirement:
- 401(k): Many employers offer 401(k)s, which take contributions directly from your paycheck. Many companies will match your contributions, up to a limit. If yours does, you should invest at least enough to earn the match before investing elsewhere.
- Traditional or Roth IRA: Individual retirement accounts can be opened regardless of whether you participate in a 401(k). Contributions to a traditional IRA are tax-deductible, but distributions are taxable when distributed in retirement. Roth IRAs differ from traditional IRAs in that contributions are made after-tax and no tax deductions are available upfront, but money grows tax-free and distributions are not taxed upon retirement. Self-employed individuals can also benefit from retirement accounts.
If you’re investing for another purpose:
- Taxable account: Nonqualified accounts, also known as brokerage accounts, are flexible investment accounts not designated for any specific purpose. In contrast to retirement accounts, there are no limits on how much you can contribute, and you can withdraw funds at any time. Tax-deferred accounts don’t have tax deductions, but if you have maxed out the above options for retirement savings, you can still save in a taxable account.
- College savings accounts: These accounts offer tax benefits for saving for college, just like retirement accounts. College savings are commonly made with 529 accounts and Coverdell education savings accounts.
The only exception is a 401(k), which is offered by your employer.
4. Sign up for an account.
You need to choose an account provider once you know what kind of account you want. There are two main options:
- An online broker allows you to manage your account yourself, buying and selling stocks, bonds, funds, and more complex investments. Online brokers offer a variety of investment options for investors who prefer to manage their accounts themselves.
- The robo-advisor will build and manage a portfolio based on your risk tolerance and goals with the help of computers. There is a fee associated with the service, usually between 0.25% and 0.50% per year. Generally, robo-advisors do not offer individual stocks or bonds, as they often use funds. However, they can be ideal for investors who like to remain hands-off.
5. Assess your risk tolerance before investing
The first step in figuring out how to invest money is to ask where you should invest it. If you are willing to take on more risk in exchange for higher potential investment rewards, then the answer depends on your investment goals and risk tolerance. Among the most common investments are:
- Stocks. Shares (pieces of ownership) of companies you anticipate increasing in value.
- Bonds. Bonds are used to finance projects or refinance debts by companies and governments. A bond is a fixed-income investment that pays investors interest regularly. Upon maturity, the principal is returned.
- Mutual funds. You can buy stocks, bonds, and other investments at once by investing in funds, such as mutual funds, index funds, or exchange-traded funds (ETFs). A mutual fund builds instant diversification by pooling investor money and using it to purchase investments aligned with the fund’s objectives. Professional managers select the investments for active funds, or index funds track indices. Stocks from 500 of the largest companies in the United States, for example, will be included in a Standard & Poor’s 500 index fund.
- Real estate. In addition to stocks and bonds, real estate is a great way to diversify your investment portfolio. Investing in real estate doesn’t necessarily mean buying a home or becoming a landlord – you can invest through online platforms that pool investor money or through REITs.
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